Why Banks do Short Sales: 

Q: What makes a bank decide whether to take a discount on a defaulted mortgage or not? 

There are a number of factors that go into a lender’s decision about whether (and by how much) to discount a loan gone bad. 

The first step in getting a particular lender to consider your short sale offer is to have all your documents in order . Before the lender will even discuss an offer with you, you’ll need a signed purchase contract and a letter of permission from the seller allowing the bank to discuss the loan with your realtor or attorney.  Most banks will assign a negotiator to the loan.  And there’s usually only one person within a given institution who has the power to take offers to the board, so discussing your offer with anyone else is a  waste of time. 

Once you have all your papers in order, and are talking to the right person who can make the decisions regarding your short sale, there are a number of other factors that could affect how open the lender is to your offer. One is where the loan is in the foreclosure process. If the borrower is just a few months behind—or if the auction is happening in 3 days—the bank might not be terribly motivated to take a major discount. In the first case, they may assume that they can work out a payoff with the owner: in the second, they’ve already invested a great deal of money in legal fees, and may feel that it’s better to take their chances on getting the property back and reselling it on the open market.

The condition of the property is another major issue with some lenders.  Most lenders are hesitant to take back a property that needs major repairs, or that has building orders violations.  In other words, the worse the condition of the house, the better the chance that the lender will negotiate.

The requirements of the lender’s private mortgage insurance company or of FHA and VA insurance also influence its decision about how much to discount, as does the housing market, difficulty of foreclosure in a particular state, number of bad loans the bank is dealing with, likelihood that the owner will declare bankruptcy, and many, many more variables. So bottom line, there’s no short answer and every lender is different. 
We will present all offers and negotiate directly with the negotiator assigned to your loan. You will not have to discuss anything with the lender.    

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